Recently, Microsoft declared that IBM, and not Google, is their greatest threat:

“The biggest company in the computer industry by far is IBM. They have four times the employees that I have, way more revenues than I have. IBM has always been our biggest competitor. The press just doesn’t like to write about IBM,” said Bill Gates.

At first, I was a little skeptical of this claim, but after some careful consideration, I realize that Bill Gates is probably telling the truth. After all, you very often hear about Google rivaling Microsoft in the search engine field. But when put in perspective, most people fail to recognize that Google is competing against only a tiny fraction of Microsoft. While the large majority of Google employees are commited to search engine technology, Microsoft operates in many different markets, and MSN is only one of these small arenas. Thus, Google is not as big of a threat as people think it is compared to Microsoft’s total industry.

If IBM continues to flex its muscle with open source software, however, then it could have a very negative affect on Microsoft. And given IBM’s recent use of free and open source software, IBM might just be their biggest competitor. Let’s look at it more closely.

While Microsoft is a proprietary software vendor, IBM is a hardware and services company. From a services angle, the best route to maximize profit is to go with a non-proprietary infrastructure, to avoid getting bogged down with licensing costs, while still getting maximum value for your consulting services. And if you’re hired to consult for someone, you actually have to send people there. The key part of the equation is people — people can only be at one place, or do one thing at a time. So if you have a new support contract, you have to hire additional support staff. If you get a new maintenance contract, you have to hire additional maintainers. IBM is selling labor to companies. If they sell additional products, they have to hire additional consultants, and the cost is almost directly proportional.

Microsoft, on the other hand, has made a conscious decision to stay out of the support and consulting business for its software. Instead, they rely on third-party Microsoft Partners to handle these issues. Microsoft could have become like IBM and built its own service and support arm, but they cannot easily do so without alienating partners that it needs very badly.

Despite the fact that IBM is a giant like Microsoft, they have shown themselves to be resiliant and have weathered a lot of storms:

• They are one of the only companies still doing pure scientific and technology research, especially in semiconductors. The only other giant research operations outside of universities are IBM, HP, and AT&T Labs, as far as I know.
• They killed their low-margin PC business. For better or worse, it definitely improved their profit margin. IBM is diverse, but they aren’t trying to monopolize every segment of the market.
• IBM has worked with, and not against, open source technologies. No matter how the whole OSS movement shakes out after the dust settles, IBM is ideally positioned. Almost all their proprietary products can run on both closed and open source systems.

Microsoft, in sharp contrast, has changed their business model very little over time. If Microsoft is successful, then the new Microsoft will look a lot more like the IBM of today. If Microsoft is unsuccessful, then they will probably die.